Last January, Kevin Taylor and his colleagues at construction group McLaren started to discuss the looming threat of inflation. Then, they started to discuss it with customers. It was a conversation that would come to dominate much of the year – and which is ongoing.
“Our opinion was that there was going to be rampant inflation in the marketplace for many reasons,” says McLaren founder and chairman Taylor, rattling off a checklist of challenges in his Chiswell Street office in the City of London. “Labour going back home, factories starting back up again, no surplus materials because it had all gone out and people would say they’re not manufacturing, trainees not coming into the industry, people retiring early…”
The list went on, and sure enough the prices rose, with material, labour and energy costs rocketing over the course of last year. Recent government data shows that the cost of construction materials – including steel, timber and concrete – shot up by close to a quarter in 2021, roughly equal to the rise seen across the previous 12 years combined.
That will influence every level of decision-making. McLaren declined to pitch for an unnamed £180m job early last year because of inflation worries, Taylor says.
“At the time the advisers to the customer said that there would be no inflation,” he says. “The project was a four-year project, and a competitor has taken that on with zero inflation [factored in]. We calculated the inflation on that project now will be to the tune of £30m. And they’d done it for a fixed price back in Q1. We walked away from that.”
A year on, the issue is just as pressing. A report last month from restructuring specialists at Begbies Traynor described inflation as “the greatest threat to the economy”. The construction sector “looks particularly vulnerable” given raw material availability and record inflation, the team added.
For Taylor, the issue provides an opportunity to rethink relationships with developers and all other parties in the supply chain. But it won’t be easy.
Big beginnings
Taylor has been in business long enough to take these periods of difficulty in stride. A chartered surveyor who started his career with Birse Group (later part of Balfour Beatty), he made a name for himself at Fitzpatrick, where he was a managing director before the age of 30 and helped turn around a lossmaking construction division.
In 2001, in his early 30s, Taylor set up McLaren with chief executive Phil Pringle. The company’s first job was a development on the site of a former Kodak factory in Hemel Hempstead for Landsec, which the start-up won away from larger competitors with a show of commitment and knowledge of the project – “There wasn’t a cockroach on that site we didn’t know about,” Taylor says. More big-name clients followed. Some, during the financial crisis of 2008 and 2009, asked McLaren to fund entire projects ahead of a lump sum “bullet payment” once the scheme was complete.
That wasn’t the best use of McLaren’s capital, Taylor reasoned at the time – but starting a development arm could be. In 2010 he set up McLaren Property with chief executive John Gatley, who moved across from an executive post at Capital & Regional to become co-owner and chief executive. As well as commercial and logistics schemes, the company pushed into the student accommodation market.
Two decades after launching the McLaren name, the group companies have continued to move into new markets – the build-to-rent space is a current focus for Matthew Biddle and colleagues at McLaren Living, while Taylor also highlights opportunities in the healthcare sector and in data centres, where the group is handling two projects for Amazon. Final figures for 2021, Taylor says, should show turnover coming in at £700m.
Managing risk together
But costs will remain a challenge in the near-term. When Taylor speaks with EG towards the end of last year, he says discussions with customers in the early part of 2022 will be similar to those held when inflation fears first started to build.
“What every customer is trying to get an understanding of is how long and by how much inflation will go on for – and shortages and lead-in periods of certain products,” Taylor said.
Forecasting remains difficult and is trade-specific, Taylor says, but he sees little sign that the pressure will lessen this year. “We can see that there is a foreseeable labour shortage because people are not remaining in the UK and people are not coming up through the ranks,” he says. “And then the big producers of certain materials, when they’ve got monopoly, it’s difficult for us to predict what [they’re] going to require for their own reasons.”
London mayor Sadiq Khan has warned of the hit to housebuilding in the capital that is likely to result from the cost hikes and workforce shortages.
“Without bricks and mortar, and enough skilled workers, the excellent progress we have made in delivering the good-quality and genuinely affordable homes that Londoners need is at risk of stalling,” Khan said in January.
“I sympathise very much with our customers,” Taylor says. “It’s a difficult situation to manage, but we are as open as we can be and connect the supply chain to our customers so everyone’s got an understanding. So jointly, we can manage the risk.”
Close cooperation with customers is the only effective way to steer all parties through the tougher times, he adds.
“We get engagement with our customers early doors,” he says. “We’re saying, ‘we’re here to help’. We’re increasingly seeing budgets under extreme pressure from our customers because of the rising cost base.”
Help can be found in designing to cost, Taylor says – easier to achieve when the customer, consultants and other parties in the supply chain can work together “right at the beginning” of a project.
New mentality
Indeed, for Taylor, the solution is not only to try and get costs down, but also to create more value – finding a way to add more flats to a scheme by rethinking how service voids affect floor to ceiling heights, for example. “Because we’ve got the mentality of having our own development company as well, maybe that helps a bit with being more aligned with some of our customers to understand really what the objectives are and how we can create value there.”
Early procurement can help to act as a hedge against inflation. But here too there are stumbling blocks. “It’s not only about the cost and better design and better value, but in this market two other things: the availability of certain parts, like materials; and [whether] subcontractors have got the capability or capacity with their own workforce to fit in with our programme.
“You’ve got to be mindful. You got a check in the box for the right financial answer. But can you deliver it in the timeframe with all the components?”
Keep learning
Taylor has been handling these business pressures at the same time as trying to guide his team through the pandemic. Like many company leaders, he has to show a path ahead for colleagues who may never before have worked through a crisis, financial or otherwise.
“The first priority was to keep everyone healthy and safe,” he says of his focus during the Covid-19 outbreak. “Second was to keep people employed where we could [the company used the government’s furlough scheme]. And then we wanted to encourage people to support the sites and the offices, where we could in line with the government guidelines.”
Throughout it all, the chairman says, he wanted to encourage an approach of “managing the here and now and believing in the future” and “keeping that positivity”.
The message to the troops, in his words, was: “We will get through this. We will work through this. All bad situations come to an end.”
It’s an optimistic note on which to end the conversation, even given the hard work ahead. As we wrap up, Taylor mentions how fortunate he feels to be part of an industry that he continues to love so much.
After two decades, he still enjoys receiving WhatsApp messages from friends who have spotted some McLaren hoarding somewhere and want to know more about the project behind it.
“If you do everything right – the right tender, the right supply chain, the right design – profit should be a by-product,” he says of his approach to the business. “Keep moving on, keep progressing, keep learning. And enjoy it. You’ve got to enjoy it.”
To send feedback, e-mail tim.burke@eg.co.uk or tweet @_tim_burke or @EGPropertyNews
